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PROTTER v. NATHAN'S FAMOUS SYS.

May 11, 1996

ERWIN PROTTER, FAST FOOD FRANCHISE, INC., FAST FOOD FRANCHISE OF BROADWAY, INC., and FAST FOOD FRANCHISE OF STEINWAY, INC., Plaintiffs,
v.
NATHAN'S FAMOUS SYSTEMS, INC., HOWARD M. LORBER, WAYNE NORBITZ, RAYMOND DIOGUARDI and CARL PALEY, Defendants.



The opinion of the court was delivered by: SPATT

 SPATT, District Judge:

 Presently before the Court is a motion to dismiss the plaintiffs' Amended Complaint, brought by the defendants Nathan's Famous Systems, Inc. ("Nathan's'), Howard M. Lorber ("Lorber"), Wayne Norbitz ("Norbitz"), Raymond Dioguardi ("Dioguardi") and Carl Paley ("Paley," collectively the "defendants") pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) on the grounds that plaintiffs' Amended Complaint is time barred, that it fails to state a claim upon which relief can be granted, and that it fails to plead fraud with the required particularity.

 On October 21, 1995, this Court granted the defendants' motion to dismiss with respect to the plaintiffs' RICO claims for failure to state a viable cause of action under 18 U.S.C. § 1962 and dismissed the remaining state law claims for want of subject matter jurisdiction. See Protter v. Nathan's Famous Systems, Inc., 904 F. Supp. 101 (E.D.N.Y. 1995). The plaintiffs were granted leave to amend the Complaint within 30 days. Id. Familiarity with the Court's earlier decision is presumed.

 Adhering to the court's admonitions, the plaintiffs filed their Amended Complaint on November 20, 1995. Once again, plaintiffs seek to recover compensatory damages, treble damages, punitive damages and costs and attorneys' fees based on violations of RICO, the New York State Franchise Sales Act, and for common law fraud. In response, on March 6, 1996, the defendants moved to dismiss the Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b).

 I. Background

 The following facts are taken entirely from the Amended Complaint. Erwin Protter is a New York resident domiciled in Queens, New York. Protter is the president of the three corporate plaintiffs, all of which are New York corporations with their principal places of business located in Queens, New York. Nathan's is a Delaware corporation with its principal place of business in Westbury, New York. Defendant Lorber is the Chairman of the Board of Directors; Norbitz is President, a Director and Chief Operating Officer; Dioguardi is Vice President of Finance and Chief Financial Officer; and Paley is the Vice President of Franchise Development.

 Nathan's is the franchisor of the "Nathan's Famous" franchise system, which is famous for its hot dogs, crinkle-cut french fries and a wide array of other fast food items. In February 1993, the defendants completed an initial public offering ("IPO") raising approximately $ 15 million. The purported objective of the public offering was expansion. Specifically, the defendants sought to open new company-owned restaurants in the New York metropolitan area, and repay senior debt. Subsequent to the IPO, the plaintiffs commenced negotiations with Nathan's for the purchase of three Nathan's franchises at the following locations: (1) 389 Avenue of the Americas, New York, New York; (2) 864 Broadway, New York, New York; and (3) 31-16 Steinway Street, Astoria, New York. On March 17, 1993, Protter entered into a Franchise Agreement on behalf of Fast Food to purchase the Nathan's franchise at 389 Avenue of the Americas. On November 16, 1993, Protter entered into a Franchise Agreement on behalf of Broadway to acquire the Nathan's franchise at 864 Broadway. And on February 28, 1994, Protter entered into a Franchise Agreement on behalf of Steinway to obtain the franchise at 31-16 Steinway Street. Protter personally guaranteed each of these purchases. The plaintiffs now contend that the purchases were induced by the defendants' oral and written material misrepresentations, which Protter reasonably relied upon during the course of the negotiations.

 Moreover, Protter asserts that the defendants misrepresented the franchisor's overall success. For example, Nathan's represented that many of their company-owned stores were highly profitable in an effort to induce Protter's purchase of the franchises. Yet Nathan's failed to explain that in December 1992, sales for Coney Island Hot Dogs, Inc., a multiple unit franchisee operating in the northeast had a 24.7% decline in sales with individual stores experiencing declines as high as 46.5%. Moreover, sales declines were pervasive in 1993, culminating in a 12.9% decline in December 1993. Similar declines were experienced by Nathan's largest franchisee in Florida, Coney Island Hot Dogs of Florida, which had a 26.5% decline in sales in December 1992 with individual stores losing as much as 30.7%, and declining sales throughout 1993 culminating with a 17.3% drop in December 1993.

 Protter further alleges that Nathan's misrepresented its resolve with respect to its purported use of the $ 15 million raised in the initial public offering. The plaintiff alleges that he was told that those funds were to be allocated towards improvement of the franchisor's infrastructure and the opening of 19 new company-owned restaurants. Since then however, no steps have been taken to implement this program.

 The Amended Complaint further alleges that Nathan's stated that it would approve all site locations and menus to maximize use of space and customer preferences. Yet with respect to the restaurant located at 389 Avenue of the Americas, the defendants never informed plaintiffs of the failure of a company-owned store located across the street ten years earlier.

 In addition to these misrepresentations, Protter alleges several omissions of material facts in order to induce the franchise sales. Specifically, the plaintiffs refer to the defendants' failure to disclose significant hidden costs associated with running the franchises and the severity of sales declines that other stores were experiencing over the last several years; that other franchises had found themselves in a variety of financial difficulties at the time the plaintiff entered into the Franchise Agreements; that prior to entering the franchise agreements the defendants failed to admit that they were parties to lawsuits; and that the defendants received kickbacks from third parties, presumably for referring the plaintiff to these third parties for services rendered while operating the franchises.

 Finally, Protter asserts that he was not the only franchisee to have been defrauded by the defendants. The plaintiffs claim that from September through November 1993, one Steven Lenter ("Lenter") was also persuaded to purchase a Nathan's franchise based on misrepresentations and omissions similar to those outlined above. The plaintiffs also submit an affidavit from Daniel Rapoport (Rapoport"), owner of Bay Plaza Famous, Inc., a Nathan's Famous franchisee. Like Protter and Lenter, Rapoport claims that he was defrauded by Nathan's into purchasing a franchise. The Court expressly notes however, that the Amended Complaint contains no allegations with respect to Rapoport and the Court cannot consider the affidavit on a Rule 12(b)(6) motion to dismiss.

 Protter claims more than $ 1.8 million in damages, including franchise fees, construction and equipment expenses, legal expenses, and rental expenses due to the delays in opening the restaurants, all as the result of the defendants' unlawful activities. In addition, Protter asserts that by virtue of the promised 25 percent return, he has lost $ 1 million in profits and stands to lose another $ 10 million. As a result, he seeks $ 13,088,359 in monetary damages.

 II. Discussion

 
A. The standard of review

 On a motion to dismiss for failure to state a claim, "the court should not dismiss the complaint pursuant to Rule 12(b)(6) unless it appears 'beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052-53 (2d Cir. 1993). The Second Circuit stated that in deciding a Rule 12(b)(6) motion a Court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken." Samuels v. Air ...


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